Why one Wall Street exec sees a better M&A environment

NEW YORK (MarketWatch) — Mergers and acquisitions activity for the coming year could be set to increase with the amount of cash on corporate as well as private-equity balance sheets, says the co-head of UBS’s U.S. mergers and acquisitions business.

Also helping the M&A environment is a more stable economic situation in Europe and increased activity from activist investors, Marc-Anthony Hourihan said in an interview with MarketWatch.

Hourihan is a 20-year UBS veteran and has served as an adviser on major deals including Eli Lilly & Co.’s
LLY, -0.04%
$6.5 billion acquisition of ImClone Systems and Cardinal Health Inc.’s
CAH, +1.97%
purchase of Viasys Healthcare.

Mergers and acquisitions activity can be an indicator of confidence corporate CEOs have in the economy.

Getty Images

A combination of pictures created on August 29, 2013 shows the logo for Verizon Wireless (bottom) in Washington DC on June 2, 2010 and the logo of mobile network provider Vodafone in Hanover March,14 2007.

Some of the biggest mega-deals that were made last year include Verizon Communications Inc.
VZ, +0.26%
buying out Verizon Wireless from Vodafone Group PLC
VOD, +0.03%
for $130 billion, Berkshire Hathaway Inc.
BRK.B, -0.08%
and 3G Partners buying H.J. Heinz for $23 billion and Michael Dell and private equity firm Silver Lake buying Dell Inc. for $25 billion, making 2013 the best year for deal activity in the U.S. in the last five years.

U.S. mergers and acquisitions volume in 2013 of $1.18 trillion was up 20%, according to Dealogic.

Hourihan spoke to MarketWatch about what he expects for the coming year, why last year was just OK and what happened to hostile takeovers in M&A.

MarketWatch: How would you describe mergers and acquisitions activity in the last year compared to years past and also pre-crisis?

Hourihan: Last year mergers and acquisitions activity in the U.S. was fairly good. We were up double digits in terms of volume and the average size of deals was up. There were a lot of elephant deals that were $10 billion and up. That end of the market on a global basis continues to shrink. What has hurt M&A last year was Europe. When you have one of the main pillars sagging, it’s tough. But there is a fairly healthy participation in European companies in cross-border M&A activity.

MarketWatch: The tech and telecom sector seems to have had a lot of deals. Is that a trend you expect to continue? What sectors will stand out in 2014?

Hourihan: Real estate, technology, healthcare tend to perform fairly well. A little less in terms of power and energy, industrial and a little less in financial institutions. When you look at the year ahead, the upcoming year will be a great year, looking at the amount of cash in balance sheets and private equity. There is something close to $1 trillion on corporate balance sheets. What is a little different this year is that Europe is better in terms of trending upwards, but I don’t think we will have same sort of Greece, Spain situations we have seen. I am somewhat hopeful that it won’t be a negative source of concern.

MarketWatch: You mentioned the mega-deals in 2013, including Dell and Verizon but some have said it was not a standout year for M&A. Do you agree?

Hourihan: If you look at the big deals that have happened, Fiat, Glaxo, and even Verizon, it’s situations where they are buying the rest of the company they already own. And now it is the cheapest time to buy that. These “old chestnuts” that have been kicking around for a while. In general, there is an incentive while interest rates are still low, now people are finally looking at deals and saying we may as well do that. The window will begin to close on great financing.

MarketWatch: What are you concerned about in 2014 that could hurt the case for M&A?

Hourihan: There is still some concern in terms of balancing the budget. Given how bad the aftertaste of the last battle was, there is some view that it might be better this time around. We are not viewing 2014 as a huge jump in M&A. A slight increase in global, slightly increase in U.S. The confluence of positive things may not last right now.

What will be interesting is what happens in the general industrial area, it’s such a big section of the market. There were antitrust reviews through last year, with the American Airlines and US Airways deal. We’ll have to see how that might shake out and how it resolves. It’s about whether the current administration be more moderate going forward.

MarketWatch: How did activist investor pressure make a difference in 2013?

Hourihan: In 2013, activist pressure really crept up in some of the bigger companies, more in $10 billion and up range. We expect that to continue and it has to do with portfolio management and has to do with spin-offs and sales of businesses, and we are seeing the market rewards. That portfolio rationalization can drive activity in the middle market, which can be meaningful. Look at examples like the Hess Corporation
HES, -2.19%
and Murphy Oil Corporation
MUR, -6.23%
situation or the Dan Loeb and Sony Corp.
SNE, -2.64%
situation.

MarketWatch: There has not been a lot of hostile activity with M&A in recent years, why is that and can we expect that to change?

Hourihan: The lack of hostile activity has been perplexing over the last few years, buyers and sellers agreeing to price with lots of liquidity. Hostile activity happens when there are sudden changes in valuations, if you have situations that have been valued pretty high and all of sudden come down. You start to see it when there is a board that is still looking at the rear view mirror. We haven’t had that type of activity in a while, the peak for hostile M&A was 2006 and 2007.

MarketWatch: The Men’s Wearhouse Inc. and Jos. A Bank Clothier’s Inc. story is interesting, can you talk about that?

Hourihan: There is an activist angle there with Eminence Capital. [The hedge fund took a 9.8% stake in Men’s Wearhouse
MW, -0.05%
back in November according to reports and is currently the top holder in the firm]. What originally kicked that off is that the value was down for [Men’s Wearhouse]. It was an example of the board that lost their way.

Intraday Data provided by SIX Financial Information and subject to terms of use.
Historical and current end-of-day data provided by SIX Financial Information. Intraday data
delayed per exchange requirements. S&P/Dow Jones Indices (SM) from Dow Jones & Company, Inc.
All quotes are in local exchange time. Real time last sale data provided by NASDAQ. More
information on NASDAQ traded symbols and their current financial status. Intraday
data delayed 15 minutes for Nasdaq, and 20 minutes for other exchanges. S&P/Dow Jones Indices (SM)
from Dow Jones & Company, Inc. SEHK intraday data is provided by SIX Financial Information and is
at least 60-minutes delayed. All quotes are in local exchange time.